Economists React: ‘Who Could Ask for Anything More?’

Today’s FOMC statement will go down in the annals of Fed history along with Paul Volcker’s Saturday announcement going to reserve targeting in 1979. Volcker’s press conference was called the “Saturday Night Massacre.” I nominate this one to be called the “Who Could Ask for Anything More?” statement. The Fed is throwing everything in its arsenal at the economic/financial situation. –Stephen Stanley, RBS Greenwich Capital

The core was restrained The FOMC statement was more aggressive than anticipated, indicating that policymakers “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” The vote was unanimous. In our view, here are the three most surprising aspects of the statement: 1) The official target rate was reduced all the way to 0.0% to 0.25% (let’s call it 0.125%)… 2) A conditional commitment to keep the policy rate low “for some time.” … 3) An indication that the Fed is considering the purchase of long-term Treasuries.” –David Greenlaw, Morgan Stanley

In practical terms, the decision to slash the target rate will do almost nothing to boost economic activity. However, it does send a strong message to the markets that the Fed means business, particularly when combined with the commitment to leave rates at near zero for some time. With official interest rates now as close to zero as they are going to get, the Fed’s focus has already switched to quantitative easing. –Paul Ashworth, Capital Economics

So here we are: Rock bottom. We take no satisfaction from the vindication of our view that one basis point is the right rate for the U.S; it is a reflection of an utterly desolate economic picture, which will persist for the foreseeable future as the wrenching adjustment in household finances continues… The Fed’s objective now is to “employ all available tools” to fix the economy… If zero rates don’t work, they will try anything; good. But this is a terrible, chastening day. –Ian Shepherdson, High Frequency Economics

Assuming that fed funds will not trade below 0%, there will be no interest rate constraint on accelerating the pace of the Fed’s balance sheet expansion. Rather, the 0.25% upper end of the target range will be serve as a ceiling, proximity to which will signal that more aggressive liquidity infusions are warranted. –Alan Levenson, T. Rowe Price

The action taken today and the quantitative easing moves to come speak volumes about just how petrified policymakers are that the economy is in danger of sliding into a deflationary spiral that would be disastrous considering the highly leveraged condition of the economy. Monetary policy is going to do whatever it can to try to avoid this outcome, and further substantial fiscal stimulus is also in the works. –Joshua Shapiro, MFR Inc.

The Federal Reserve wants to stabilize the financial system and prevent the economy from a deeper and protracted recession. It also is trying to make sure that the probability of a debilitating deflation is very low. However, this type of unconventional monetary stimulus has risks. Even though inflation is in remission for now, there is a meaningful risk of an inflation bubble later, especially if the central bank is successful in stimulating the economy. For now, Helicopter Ben has to put out the big fire and worry about the inflation bubble later. –Sung Won Sohn, Smith School of Business and Economics

The Fed has signaled that it is formally switching to a quantitative easing strategy that will further increase the size of its balance sheet. The Fed suggested that it would potentially up-size its purchases of GSE debt (currently set at $100 billion) and Agency MBS (currently set at $500 billion) and that it will roll out the Term Asset-Backed Securities Loan Facility in early 2009. The Fed also said that it is weighing the benefits of purchasing long-dated Treasuries—though we judge this step is still an unlikely one for the Fed to take (since it is trying to narrow the spread between MBS and Treasuries). Support for economic growth needs to come from fiscal policy at this point and we expect passage of a massive stimulus package in the first quarter of 2009. –RDQ Economics

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